In Pasquantino (125 S. Ct. 1766, April 26, 2005), the US Supreme Court upheld the conviction of participants in a scheme to defraud Canada of alcohol import taxes and duties by smuggling liquor from the United States into Canada, despite the common-law revenue rule that bars enforcement in US courts of foreign revenue laws.

The Pasquantinos ordered liquor over the telephone in New York from discount package stores in Maryland. They employed individuals to hide liquor in their vehicles and drive across the Canada-US border; the liquor was not declared to Canadian customs officials, and Canadian import taxes were not paid. The wire fraud statute (18 USC section 1343) prohibits the use of interstate wires to effect “any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretences, representations, or promises.” The object of the fraud must be “property in the victim’s hands,” which required proof of an excise tax liability to Canada and thus proof of applicable Canadian tax law.

The Pasquantinos contended that there was no violation because the government had no interest in enforcing Canadian tax laws. The US Supreme Court said that their offence was complete the moment they executed the scheme inside the United States: “[I]t may seem an odd use of the Federal Government’s resources to prosecute a U.S. citizen for smuggling cheap liquor into Canada. But the broad language of the wire fraud statute authorizes it to do so and no canon of statutory construction permits us to read the statute more narrowly.” Canada’s interest in the excise tax revenue was “property” within the statute’s meaning, being a right to be paid money. The court also concluded that routinely concealing liquor and failing to declare it to Canadian customs officials was a fraudulent representation: “[T]hey represented to Canadian customs officials that their drivers had no goods to declare.”

The principal issue before the court was whether a wire fraud scheme to defraud a foreign government of tax revenue was a violation within the ambit of the wire fraud law. The dissent concluded that it was not: (1) there is a presumption against the extraterritorial application of federal statutes, and the law does not suggest that Congress affirmatively intended extraterritorial application; (2) the law that expressly addresses international smuggling provides US criminal enforcement of foreign customs laws only for nations that enact reciprocal laws against smuggling into the United States, and Canada has not done so; (3) the Canada-US treaty that addresses the collection of taxes did not apply because the taxes at issue had not been finally determined and because the Pasquantinos were US citizens when the tax liability was incurred; and (4) indictment under Canadian law and extradition to Canada was an alternative to prosecution in US courts, and Canadian courts are better able to decide whether their excise laws have been violated.

The majority rejected concerns about the extraterritorial application of the wire fraud law: the Pasquantinos were convicted for conduct that occurred in the United States. The criminal conduct was not the smuggling of liquor into Canada but the use in the United States of telephone wires to execute their scheme to smuggle. The common-law revenue rule did not apply because in 1952, when the wire fraud statute was enacted, no case had clearly established that the rule barred the United States from prosecuting a fraudulent scheme to evade foreign taxes. Moreover, the plain language of the federal statute makes no exception for frauds to evade foreign taxes. Concerns about the interference of US courts in the intricacies of foreign tax policy were rejected: the prosecution was brought by the executive branch, which was responsible for US foreign policy. The court assumed that “the Executive has assessed this prosecution’s impact on this Nation’s relationship with Canada, and concluded that it poses little danger of causing international friction.”

The court’s opinion creates new opportunities for US federal prosecutors. As the dissent pointed out, wire fraud, like mail fraud, is a predicate offence under the Racketeer Influenced and Corrupt Organizations Act (RICO) and the money-laundering statute. The decision broadens the reach of those statutes and exposes certain defendants to the severe criminal penalties and forfeitures therein. Furthermore, as the dissent also pointed out, the decision may lead to more frequent and aggressive federal prosecutions for using the mails or wire communication to evade state and local taxes.